Renovation and Maintenance Prices Soar
To tell an owner of rental properties that they would be better off selling those privately held assets and reinvesting into publicly traded real estate stocks might come across to some as almost offensive. People that have built up portfolios of home and condo rentals over many years consider their portfolios as the holy grail of independent asset management where they have 100% control, or close to it, of all aspects of the assets.
However, the rental market for those savvy buyers of single properties where positive cash flow and appreciation over the past 12 years has been exceptional is now running into some headwinds where the owners have little or no control—perhaps chief among them, the soaring costs of upkeep and maintenance. It’s no secret that getting a skilled tradesman to service a repair on a timely basis has become more of a challenge today than at any time in recent memory.
Invariably, almost every property is in need of a major repair at some point, the cost of which can potentially eliminate months or even years of rental income received. For example, older homes have older water main lines to the street. A typical repair can cost between $20,000-$40,000, or more, depending on how far the house is from the street, and most insurance policies don’t cover these kinds of repairs for houses over 40 years old, which account for a big slice of the fixer-up rental market.
Then there are exceptional situations, like during Covid when federal, state and even local governments enacted various legislation (such as the CARES Act and the American Rescue Plan) imposing rent eviction moratoriums and offering rent relief. In some circumstances tenants, regardless of whether they were impacted by COVID, took advantage of the rent eviction moratoriums and simply stopped paying rent, or worse yet, trashed rental properties resulting in owners having to sue for back rent as well as damages. There are potentially thousands of private property owners in the midst of this upheaval spending thousands in legal fees that may result in nothing.
We live in some of the most litigious times in history. Some tenants will sue landlords over just about anything—traces of mold, wrongful eviction, breach of quiet enjoyment, structural defects, rodent infestation, infractions of the Federal Fair Credit Reporting Act, security deposit disputes, non-disclosure of material risks to the property or surrounding area, and so on.
I’m laying out some of the many risks that most property owners are probably all too acutely aware of, and, if they are smart, already do due diligence on and keep their properties in good shape. But inflationary costs can eat fiercely into returns, especially in the case of owners of small portfolios of rental properties, where raising rent may prove risky in maintaining established tenants. Jacking rent by 25% to compensate for the cost to carry a single property can prompt exits that risk leaving the property vacant for months, a risk that many landlords may be coping with presently.
And then there is the value of an owner’s time to oversee a property, a factor that escapes most owner/landlords, where they don’t pay themselves for the hours invested in managing their portfolio of rental units. This is not a hard cost and is rarely if ever accounted for. But there is an old saying in running a small business—pay yourself first.
If these factors have become or are becoming points of stress for owners of physical properties, then an alternative may be the hands-free, time-saving, liquid, tax-advantaged benefits of owning publicly traded real estate stocks and particularly those companies investing in Qualified Opportunity Zones.
A multi-family residential listed real estate structure can offer investors diversified risk among several properties, dedicated management and maintenance of properties, significant economies of scale, lower operating costs during periods of inflation, lower or no transaction fees and a management team focused on total return and shareholder value.
The number of property sellers looking to lighten up in the current environment, sensing possible stagflation or recessionary pressures, seems to be increasing. And though real estate, in general, is a historically good inflation hedge, it fully depends on the subset of the market one is invested in. If economic conditions are softening, but the cost of maintaining the property is steepening, the investment proposition becomes more challenging.
As an alternative, sellers of properties that are sitting on capital gains and nervous about purchasing another like-kind property can consider placing those capital gains into a Qualified Opportunity Zone Fund (QOF), which can defer the tax payment on those capital gains out to December 31, 2026. Belpointe PREP, LLC (NYSE American: “OZ”) is a QOF that is developing and acquiring Class-A multi-family residential properties in some of the strongest job markets and fastest growing cities in the U.S. Moving real estate capital gains into a managed QOF, like Belpointe PREP (NYSE American: “OZ”), with tax benefits that comes with the opportunity for growth and income, should have great appeal in the present environment among cash-rich sellers seeking a smart and potentially lucrative investment opportunities.
The chance to invest in opportunity zones—a government-created program designed to incentivize investing in some of the most essential segments of the broader real estate universe—is a generational opportunity that provides a legal and hugely attractive alternative to the 1031 like-kind exchange, with its requirement to buy another physical property within 180 days. We spell this alternative out in our updated white paper. CLICK HERE To Download.
So, here is the investment proposition that Belpointe PREP (NYSE American: “OZ”) offers that just might be the right fit for those seeking an alternative asset that is liquid. Belpointe PREP is the first and thus far the only publicly listed QOF and it requires no paperwork and NO QUALIFIED INTERMEDIARY to invest. This option removes a ton of time pressure and offers what we consider compelling potential for total return.
Very simply, Belpointe PREP provides investors with the ability to pair off year-to-date 2022 capital gains, using a 180-day look-back window, and reinvest those capital gains to defer and possibly eliminate capital gains taxes, in addition to offering investors an opportunity for growth and income, out to December 31, 2026, where all capital appreciation and the majority of pass-through income may be tax-free.
Download and read up on all of the tax benefits that investing in Opportunity Zones provides from both the federal and state governments. The U.S. Treasury has certified 8,764 communities in all 50 states, the District of Columbia, and five U.S. territories as Opportunity Zones, where nearly 35 million people reside according to the U.S. Treasury. These Opportunity Zones represent communities in need of direct investment by private investors and where there is significant potential for income and growth.
While there are multiple QOFs to choose from, none are publicly listed and traded on a national securities exchange other than Belpointe PREP (NYSE American: “OZ”). And with Belpointe PREP there is no risk of future capital calls, as spelled out in Belpointe PREP’s prospectus and SEC filings. Most other QOFs are illiquid or require early exit fees and can require investors to add additional capital to cover unexpected costs in the projects that they sponsor. And we are fully aware that life happens and plans change. As noted, if at any time an investor in Belpointe PREP (NYSE American: “OZ”) units needs access to their funds before December 31, 2026, they can simply look to sell the stock.
Belpointe PREP is building Class-A full-featured multi-family residential housing communities in markets that it believes have strong macroeconomic fundamentals, such as Nashville, TN, Tampa-St. Petersburg, FL, and Sarasota, FL.
In addition, Belpointe PREP’s management team is actively seeking to acquire other QOFs that have stabilized their properties, where there are some clear benefits to acquiring seasoned properties in lieu of new construction with all its attendant risks. Our acquisition team is actively looking for sellers of properties within Opportunity Zones. Belpointe PREP has cash and currency in the form of its Class A units “OZ” that provide the kind of liquidity that some selling parties may desire.
Belpointe PREP commenced trading on the NYSE American on October 18, 2021, at $100 per Class A unit. As of July 20, 2022, units of OZ were trading around $98, a slight discount to NAV. Inflation-sensitive, income-generating multi-family residential real estate is, I believe, a necessity and revitalizing cities with the blessing of federal and state mandates, laws and tax provisions is, in my mind, a worthy purpose-driven endeavor to improve the lives of millions of people while also giving those that invest in these communities the opportunity for stable income, long-term growth and multiple tax advantages.
Cody H. Laidlaw
255 Glenville Road
Greenwich, CT 06831
T: (203) 883-1944
Disclosure: Cody H. Laidlaw is the Chief Investor Relations Officer. Cody is also an investment advisor representative with Seaside Advisory Services, Inc. (d/b/a Seaside Financial & Insurance Services), a SEC registered investment adviser offering advisory accounts and services, and holds a long position in Belpointe PREP, LLC’s Class A units.
Important Information and Qualifications
Belpointe PREP, LLC (“Belpointe PREP”) has filed a registration statement (including a prospectus) with the U.S. Securities and Exchange Commission (SEC) for the offer and sale of up to $750,000,000 of Class A units representing limited liability interests in Belpointe PREP. You should read Belpointe PREP’s most recent prospectus and the other documents that it has filed with the SEC for more complete information about Belpointe PREP and the offering
Investing in Belpointe PREP’s Class A units involves a high degree of risk, including a complete loss of investment. Prior to making an investment decision, you should carefully consider Belpointe PREP’s investment objectives and strategy, risk factors, fees and expenses and any tax consequences that may results from an investment in Belpointe PREP’s Class A units. To view Belpointe PREP’s most recent prospectus containing this and other important information visit sec.gov or belpointeoz.com. Alternatively, you may request Belpointe PREP send you the prospectus by calling (203) 883-1944 or emailing firstname.lastname@example.org. Read the prospectus in its entirety before making an investment decision.
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Neither Belpointe PREP nor any of its affiliates provide investment or tax advice and do not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should consult their own investment and tax advisers concerning the U.S. federal, state and local income tax consequences, as well as any tax consequences under the laws of any other taxing jurisdiction, in relation to their personal tax circumstances, which may vary for prospective investors in different tax situations.
This communication may contain estimates, projections and other forward-looking statements, typically identified by words and phrases such as “anticipate,” “estimate,” “believe,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “seek,” “should,” “will,” “would,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target” or the negative of such words and other comparable terminology. However, the absence of these words does not mean that a statement is not forward-looking. Any forward-looking statements expressing an expectation or belief as to future events is expressed in good faith and believed to be reasonable at the time such forward-looking statement is made. However, these statements are not guarantees of future events and involve risks, uncertainties and other factors beyond Belpointe PREP’s control. Therefore, we caution you against relying on any of these forward-looking statements. Actual outcomes and results may differ materially from what is expressed in any forward-looking statement. Except as required by applicable law, including federal securities laws, Belpointe PREP does not intend to update any of the forward-looking statements to conform them to actual results or revised expectations.
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